BUSINESS/ECONOMY

A capital flight north

LENNY GLYNN April 28 1986
BUSINESS/ECONOMY

A capital flight north

LENNY GLYNN April 28 1986

A capital flight north

BUSINESS/ECONOMY

The phenomenon is known as capital flight—and it represents the lost wealth of some of the world’s most indebted nations. And the overthrow of two former dictators, Ferdinand Marcos of the Philippines and Haiti’s Jean-Claude Duvalier, recently underlined just how massive the problem has become.

In Marcos’s case, he managed to siphon anywhere from $4 billion to $14 billion from the country into foreign accounts and investments during his time in government. Reports vary widely, but Duvalier may have sent out as much as $1 billion.

Throughout the Third World the legal or illegal export of foreign exchange has become a far-reaching and destructive trend. Indeed, wealthy individuals, government officials and corporations routinely circumvent currency restrictions and send millions of dollars’ worth of their local currency abroad. Said Walter Wriston, former chairman of Citicorp of New York and a leading lending expert: “Most people believe that the flight of capital from Latin America on deposit in New

York and Miami exceeds the total capital remaining in those countries.”

The loss of so much private wealth is a result of a lack of confidence by the elite of developing countries in their own domestic economies and fiscal policies. Many wealthy Third World residents prefer to invest their capital in

safe havens abroad—mainly in the United States, Europe and Switzerland in various banks and tax shelters. That leaves less money available for investment in wealth-producing factories, farms and resources. The problem of capital flight is now receiving increasing scrutiny and it is also making executives of financial institutions reluctant to lend the governments of debtor

nations the additional money that they need to meet their current loan payments. Declared Wriston: “If your own people don’t trust you, why should anybody else?”

In the past decade the surge of cash flow from poor to wealthy countries has increased dramatically. Wriston

estimates that nearly $4.1 billion in capital was sent out of Mexico in February alone, as Mexicans sought to protect their assets from the economic damage caused by the collapse of oil prices. Mexico has since slapped on credit controls to stanch the outflow. Because much of the cash is hidden through complex, electronie bank transactions, the exact diluensions of the outflow are impossible to pin down.

But a study by Morgan Guaranty Trust Co. of New York estimates that 10 Latin American countries that added $375 billion to their debts between 1975 and 1985 suffered a capital flight of $171 billion during the same period. Argentina, for one, incurred $58 billion in new debts while $36 billion left the country. Venezuelans took $41 billion out of their country while

the government added $36 billion in new debt.

Although lenders now criticize its damaging economic effects, the largest international banks have themselves played a key role in facilitating capital flight. Indeed, what analysts refer to as international private banking has become a prime profit maker for such leading U.S. banks as Chase Manhattan Bank, Citibank and Morgan Guaranty. Those and other institutions maintain large staffs that compete aggressively for deposits from wealthy Third World residents and companies.

Recently, the banking facilities that assist capital flight have come under increasing scrutiny. That has largely been a result of the efforts of President Corazon Aquino’s new government to retrieve some of the funds that Marcos allegedly removed from the Philippines during his 20 years in power. Last month New York Democratic Congressman Stephen Solarz, who is investigating the Marcoses’ U.S. investments, described the former president’s transfers as “one of the greatest heists in history—indeed, the theft of a nation.”

Late in March the Swiss government imposed a highly unusual freeze on Marcos family bank assets there—estimated at up to $1 billion. Last week the Swiss also froze the bank accounts of the Duvaliers.

And another New York congressman, Democrat Charles Schumer, is considering holding hearings of the House Banking Committee’s subcommittee on financial institutions on the links between international private banking and the debt crisis.

Many individuals and companies have traditionally chosen to protect their money from confiscation or excessive taxation by transferring it abroad. And many of the methods used involve simple smuggling. The Marcos family, for one, flew out of Manila to Hawaii carrying $14 million in jewels and $1.5 million worth of freshly minted pesos. (That fortune has now been seized by U.S. customs officials.) Wealthy Iranians opposed to Ayatollah Khomeini’s regime sent away about $1.4 billion in rare Persian rugs in small boats and trucks to

warehouses in West Germany.

But most of the money currently exported follows a far more complicated paper trail of dummy companies, electronic transfers and secret bank accounts. One popular method commonly

used by corrupt officials is to overprice imports. First, a 7Q foreign supplier is persuaded to attach an inflated 60 price sticker on an import item. Then, the difference between the actual and the inflated cost is depos. ited in the official’s foreign bank account. 0 An investigation by the government of Ghana in the early 1980s revealed that the country was losing at least $83 million a year through overinvoicing of imports. The evidence of capital flight from Latin America is most visible in the United States, particularly in the southwest border states and in Florida. In Miami real estate prices reflect the size of Latin American capital flows—surging in the early 1980s as oil wealth was sent north and dropping in 1983-84 as the worldwide recession, a downturn in bank lending and currency devaluations briefly dried up the flood.

Mexicans have taken large amounts of Latin American money into the United States. Since 1976, when the radical economic policies of then-president Luis Echeverría Alvarez caused the first large-scale export of capital from Mexico, thousands of wealthy Mexican families have crossed the Rio Grande and bought or started businesses in San Diego, San Antonio and other southwest cities. The Mexican government estimates that its citizens have nearly $63 billion—half the value of Mexico’s foreign debt—invested in the United States. Residents of Lebanon, Iran, South Africa and Persian Gulf sheikdoms have also exported huge amounts of wealth to the United States. And in Canada, while no figures are available, entrepreneurs from Hong Kong have stepped up their investments—especially in Toronto and Vancouver—as they prepare for their homeland’s severance from Britain in 1997.

But recently, there has been growing international pressure to reverse a trend that lenders say is evidence of unsound domestic economic policies. In exchange for new loans, lending bodies such as the World Bank and the International Monetary Fund (IMF) advocate that debtor nations adopt policies of high interest rates, currency devaluation and trade liberalization-policies designed to make it more difficult to export money.

In countries with incentive-oriented financial policies, such as Brazil, the loss of wealth to other countries is only a minor problem. But traditionally, the governments of debtor nations have objected to adopting IMF-inspired austerity programs. Third World officials argue that those policies would reduce their citizens’ standard of living and raise the prospect of domestic unrest—itself one of the major causes of capital flight. But within those nations there are indications that some residents are finally objecting to the damaging effects of capital flight. Last month the popular Mexico City newspaper Excelsior, for one, listed 575 sacadolares, or dollar grabbers, who take foreign exchange out of the country.

As some debtor nations struggle to cope with depressed export earnings caused by falling oil prices—and others find themselves struggling with debts accumulated by former rulers— the cozy relationship between local flight capitalists and the banks from the north may be severely strained. In countries such as Mexico, where the average income is less than $2,800 a year, the traditional toleration of the fondness of rich people for sending their profits abroad may also run out.

LENNY GLYNN